The stock market continues to buzz with strong interest in Nvidia (NVDA), often hailed as a leader in AI chips. But with its upcoming earnings report on the horizon, many investors are left wondering if Nvidia remains a wise investment. The company's stellar track record has set high expectations for its financial performance each quarter, and this time is no different.
In Opening Bid, Yahoo Finance Executive Editor Brian Sozzi sat down with Paul Meeks, CIO and Partner at Harvest Portfolio Management, to discuss Nvidia's anticipated earnings report and its future prospects. The conversation also touched on alternative tech investments like Super Micro Computer (SMCI) and whether Elon Musk's focus on humanoid robots might be diverting attention from Tesla's (TSLA) electric vehicle challenges.
Transcription:
Brian Sozzi
All right, welcome to a new episode of Yahoo. Finance's opening bid. I'm Yahoo. Finance executive editor Brian Sazi. Now let's make some money and get a lot smarter. And first we have to hit shares of Nike. Shout out to Jim Duffy over at Stifel. Coming out, dropping the hammer on this Monday morning on all things Nike, cutting his price target. And I couldn't help but to absolutely giggle. Is it laugh quietly in a secluded room with no pads around it, whatever it is. I really like the points Jim's making here and what I am deeming the most disappointing stock in the entire stock market of the past year. That's Nike. Duffy warning about a couple things off the jump here. First up, rapidly waning relevance of core franchises. When was the last time you heard Nike described in that fashion? That's awful. He's also saying Nike is lacking indicators that newness is driving sales in the marketplace or declining relevance of the Jordan brand. Which got me thinking. I mean, there are people alive today. Kids in high school have no really idea who Michael Jordan is, maybe a YouTube player. And they definitely know Derek Jeter.
Brian Sozzi
They know Jeter, but they don't necessarily remember him playing. Now suddenly my generation of millennials is old. I mean, we were the ones driving that Jordan brand. But anyway, so I'm losing relevance there. What Duffy is seeing is popular is on newbound sneakers. A lot of these aka, aka dad shoes, dad shoes taking share away from Nike. So I guess I can't be too surprised about that one. And they are pretty comfortable. I got a pair of $40 sketches from Target. These shoes are comfy as hell. They look like crap, but they're really cool. So all in all, Jim Duffy over at Stifel looking for just, I think, some worse than expected earnings trajectory from Nike over the next year makes sense to me. Really quick shout out. Here you go into Yahoo finance, you see Nike shares still valued at a premium to the broader market 27 times four p multiple. To me that looks absolutely ridiculous. Just given all the fundamental concerns surrounding Nike. John Donahoe, CEO since 2020, I think he's in the hot seat. He could be getting the ax within 18 to 24 months, just not getting the job done.
Brian Sozzi
Former tech executive over at ServiceNow and of course former CEO of eBay, always unsure why he's leading Nike. Nonetheless, name to watch there. All right, let's sweep Nike away to the side over there. I could talk about that one forever. And let's really get into the nuts and bolts of this opening bid episode here with me. Now is tech analyst Paul Meeks. Paul, always good to, to see you talk all things tech with you. You've been doing this for a while. You've seen many different cycles, and this is a really, this is an interesting time. We were talking a little bit about tech before we got on air here, and just this obsession. There's 493 other stocks in the S and P 500, and all people care about is tech stocks. Why is that the case, Paul? People just don't want to do their homework anymore?
Paul Meeks
Well, I think what happens is, and here's an example from my side of the house, of course, I run a tech model. Everybody knows that. But occasionally I have ultra high net worth individuals that are cool to have a tech base, but they need more. And what I do is I try to, Brian, look for other ideas. And almost no matter how hard I look, I just don't find anything as compelling. And so part of it is by default, you go to these names, the economy is set to slow even if we don't have a recession. And some people say, okay, here comes the Fed. They're going to lower rates. That should give a jumpstart to value names. But the top line growth, particularly for these AI infrastructure builders, it overwhelms the rest of the market. And I can make the case that I don't think they're particularly expensive. They're essentially pe, multiple trading in line with their growth rates. So I do think it's very compelling. If you're a tech analyst like me.
Brian Sozzi
Full time or not, let's give the people what they want. Usually I try to save the hottest topics towards the end of the podcast, so people tune into the end. It's tricks to the trade, Paul. I mean, you have to do these things. But I want to give the people what they want off the jump, and they want Nvidia analysis. They can't get enough of Nvidia. And this is just, I think, a company a lot of people never even heard of a year ago, two years ago, three, four, five, whatever it is. But they're invested in this momentum stock, in video earnings. How will you know that? This was the blowout quarter that the street and investors were looking for.
Paul Meeks
So what I expect them to do, Brian, is upside what they have been upside to the tune of at least 20%. But the key with this stock is not necessarily what they've reported, but what they say going forward about it's never been publicized by the company. The story was originally published by the information about the fact that they have a manufacturing glitch with the latest Blackwell chips. That may or may not be the case, but the company is going to be asked about it on their conference call, and they have a better, have a pretty good answer. That seems to be with the growth that they have and the confirmation in the hyperscaler's AI infrastructure spending to continue, that seems to be the only potential fly in the ointment.
Brian Sozzi
When you open up that Nvidia earnings report, Paul, where do you go and where do you start?
Paul Meeks
So I'm always looking for a confirmation of the thesis, and I think we've already had it in the preamble because the hyperscalers, the four of them combined, will be spending over $220 billion. And that is confirmed unless they essentially turn around and go back on their publicized budgets. And so we need to have a big, total available market. And I think even with the emergence of AMD and maybe some other players to be named later, Nvidia is so far ahead that they'll continue to meet and beat and they'll continue to be, you know, not to have all the slices of the pie that they have now, but the pie will be growing quickly and they will continue to be the dominant player. They just have so much in their ecosystem, a la somebody like Apple, that goes well beyond the GPU's that's going to cement their leadership.
Brian Sozzi
Why is Nvidia so far ahead? I look at AMD, and when I talk to Lisa Hsu, the CEO over at AMD, what they're working on, what she tells me they're working on. Well, one, it sounds complicated as hell. I'm not a technologist and I'm not a chip analyst, but what they are doing sounds like it supports the AI build out. I mean, how is Nvidia able to just keep such a lead over an AMD and we're not even talking about Intel. I mean, intel is still not even in this discussion, despite they have started to pick up what they're doing on the AI front. But why, so why, why is Nvidia still the leader?
Paul Meeks
Well, they were so early to the market, essentially, Jensen, Wang and company created these GPU's for computer acceleration. And so you think about it, I like their software, the Cuda software system and all the ancillary software and service products. And so they really have a very compelling ecosystem that makes it very difficult for their customers really to go anywhere else. Over time, again, I think that they'll start to erode some market share because people want to have reliable second sources and AMD will likely be the one. I don't have a lot of confidence in Intel. Intel has been the gang that hasn't shot straight for a long time. I'm almost giving up on that particular company. But I do think it'll be a two horse race and Nvidia, with all the stuff it offers with its ecosystem, will be the dominant player.
Brian Sozzi
If I always like to look at the other side of the coin, let's say Nvidia comes out here and the numbers are off the charts, but not off the charts enough to satisfy the bulls as an analyst. And I was in the seat for ten years, so I was trying to put myself back in that seat ahead of this episode. How do you download or down? Not download. How do you downgrade a rating on a company probably delivering triple digit growth rates? Is that just impossible and the streets not going to do it?
Paul Meeks
Well, I think at some point, Brian, even my price target stops going up. But what's been so interesting about this story is people will say if they take a look on returns of this company, they tripled last year, they're working on a double or triple this year. And so it must be expensive, right, because it came from a and it went up to a much higher b. But on the other hand, right now the stock is trading at about a mid thirties multiple of next year's earnings and they're going to get growth of about 35%.
Brian Sozzi
That doesn't seem expensive. I mean, to me on paper, that doesn't seem like an expensive multiple at all.
Paul Meeks
Right? Yeah. If you take a look at the peg ratio, right, p e to growth, we're trading about one, we're trading at about parity. And when I actually run a tech stock candidate screen, I'm looking for that valuation. You know, that's actually with some companies where I get in, not where I sell. So the key thing will be we're just going to have to have a lot of confidence that they'll continue to meet and beat. And I think now with interest rates about ready to go down now that we had this tell tech meltdown about a month ago, but it seems that we're back on the up and up, I'm pretty confident.
Brian Sozzi
I'm glad you mentioned the price to earnings multiple. I'm going to geek out a little bit. I mentioned on a prior episode, and this post is actually going around the Yahoo finance Twitter feed or ex feed right now. Forward priced earnings multiple is one of my favorite multiples or valuation metrics on a company. It's easy to use it makes a lot of sense. So I went to Yahoo Finance. You go to the stats page. 48 times forward earnings on Nvidia, it's below the five year average, actually, well below. Why would a stock like Nvidia not be trading at 100 times earnings? Is that a lack of belief? There's still a lack of believers out there in the true earnings power of the company, or am I just reading too much into this?
Paul Meeks
I think right now, even the bears cannot refute that the company in the near term will continue to post super growth. But here's the thing. Right now they have an outrageous kind of monopolist profit margin. Maybe over time, particularly as AMD becomes a credible second source, Nvidia will sell all the chips that they can produce, but maybe at a lesser profit and also at some point, and this is why we had the meltdown in these names a couple months ago. As you know, Brian, everybody was saying, well, all these guys are spending, not tens of billions, hundreds of billions on AI infrastructure. What happens at the other end of the pipe if there's no ROI on these projects? And so I think some people were getting in the camp that obviously, if the end players do not see adequate ROI for all this spending, they will stop that spending. And then Nvidia goes from earning gobs per share to actually what they earned a couple of years ago before the AI infrastructure boom started. So that's where the bears come in. That's why the valuation isn't allow Cisco back in the Internet bubble at 150 times earnings.
Paul Meeks
Of course, at the end of the day, it should have never been that high. But right now, Nvidia is trading at about a one peg ratio.
Brian Sozzi
All right, hang with us, Paul. We're going to go off for a quick break. We'll be right back on opening bid. All right, welcome back to opening bid. We're hanging out here with tech analyst Paul Meeks. I would say, can I say veteran tech analyst. You've been doing this for a while, right, Paul?
Paul Meeks
Oh, yeah. I've been covering the tech since 1992, almost exclusively.
Brian Sozzi
Is it.
Paul Meeks
You said you're a millennial dude. I am aging millennial, very old school baby boomer.
Brian Sozzi
That's good. That is a good thing. That's what we like to call experience, Paul. Experience. Let's channel that experience. So when you've seen, I guess, booms and busts and tech, what, what are some things people should be watching out for? Let's say Nvidia doesn't deliver. And I don't want to turn this to a whole Nvidia podcast. But I mean, it may end up being that way, whatever it is. How do investors know when that top is in, in tech? Like, I want to get people prepared for if Nvidia disappoints. I mean, we're getting a market sell off. I mean, that's just the reality situation.
Paul Meeks
Yeah, no doubt. Yeah. So what I would tell you is one of the things that I look for to at least try to get me out a little bit ahead of the rest. When the theater catches on fire and we're all trying to get out that crowded door is all. Analysts and even the media typically report on revenues that grow at a certain percentage year to year. When you see these fast growth stories like Nvidia no longer have sequential revenue growth.
Brian Sozzi
Oh, such a good point.
Paul Meeks
Oh, so that's a pretty good sign, right? Because, you know, the valuation is already in some cases ridiculous. You'll see a slowdown in sequential growth well before you see the year to year comp. And that's usually a pretty good sign to say, okay, you know, maybe it continues growing, but I got to start trimming my position.
Brian Sozzi
Shout out to Yahoo fancies Thomas Heben. I know he's an avid watcher of opening bid. Let's get that clip out there on x. I mean, one valuation tool you should be using to evaluate a tech stock from Paul Meeks. I mean, that's awesome. But look, to my point prior, I didn't want to turn this into whole Nvidia podcast because you are watching other tech stocks and why we've started to see it. Stocks sounds boring on paper, not as sexy as Nvidia, whatever, but they have been lagging or not doing much in the third quarter. Help us understand why that has been the case. And are you seeing any opportunities in it? And if not, those screens that you're running, what names are popping up as attractive?
Paul Meeks
Yeah, so the IT stocks companies like Accenture and stuff, they purport to be AI beneficiaries, right. Where they're consulting services. I'll kind of believe that when I see it. I still don't see them as that attractive. I continue, even though it makes me sound like a very boring, very lazy analyst with the AI infrastructure building trade. And so in addition to Nvidia and perhaps AMD and perhaps Broadcom, I am very focused on the data server companies, including Supermicro and Dell and Brian. Dell is interesting because that's another tell. And AMD reports their results on Wednesday, and Dell reports their results this Thursday. And then of course, another company probably in that realm is Hewlett Packard enterprises HPE. And then I look for some of the data networking plays, particularly Arista networks, because I think they're laser beam focused on AIH data infrastructure versus the old school guys like Cisco and Juniper, not so much. So the way I think you play this trade is, even though it sounds boring, even though I'm telling you, nothing new today, maybe you got to stick with what I call the AI 1.0 stocks, the guys building the infrastructure.
Paul Meeks
Because the infrastructure spending has been confirmed by the four hyperscalers. I am not going yet with the AI 2.0 plays are the ones that are supposed to be the beneficiaries. Now, last week we did get one interesting AI 2.0 data point, and that came from Workday, who didn't really quantify it. But they claim that they're guiding higher in their operating margin, not because they're selling AI stuff, but they're eating their own cooking and it's making their operations less expensive to run. And they said that their operating margin is going to go from 25% to 30% in a year. If I get more use cases like that, Brian, then I'll start to believe in the AI 2.0 place. But right now, focused on those AI one.org plays.
Brian Sozzi
You triggered some comments in me here, Paul. First, I think Dell has been really underappreciated. I know the stock has had a nice run. What they're doing in AI, that turn around that company has been mind blowing. I encourage everyone to go read that ten K hp. Antonio Nary another stock trading below ten times forward earnings. Guys cut a lot of costs out of the business, making acquisitions and then workday, Paul, I just want workday to work better. Can you just make the platform easier so I can, I don't know, look over fellow employees at the company. I mean, just make the platform easier. I mean intuitive. I mean, it's so hard. But you mentioned super micro. This is one of the most trafficked or interested ticker pages on Yahoo Finance. What is this company doing that is so fascinating to you? And what is the earnings outlook for Supermicro over the next two years?
Paul Meeks
Yeah, so Supermicro is not only one of the leaders in these AI servers that populate data centers, is they have a particular skill, particular one, osmanship, against those other two players in liquid cooled servers. And we're going pretty rapidly from air cooled to liquid cooled. So they should be able to at least keep their market share in this space and perhaps grow it now, the stock went up to over $1,000 a share. I've owned it for years, but it came down quite a bit. And it might be a buying opportunity, because when they announced their results a week or two ago, there is some controversy. And the controversy is that these AI servers that they sell to the hyperscalers, they're selling them in such big volumes with these orders that the hyperscalers can really push them on price. Right? In this case, the pricing power is with the customer, not with the supplier. And so they had only a 11.3% gross margin last quarter. Their target gross margin range is 14% to 17%. They claim that they'll get back to it by the end of this fiscal year, which is June of 25. But in the meantime, they're selling a hell of a lot of servers.
Paul Meeks
But unfortunately, who they're selling to them can say, I'm dictating on price, not you. So SMCI has a wonderful volume opportunity. This stock, if everything goes right, could ultimately earn dollar 50 per share per year. But we'll have to see if they can boost this gross margin 11.3% to 14%. It's going to take a little work.
Brian Sozzi
In the couple minutes we have left. Paul, I wrote down on my paper, ask Paul about humanoid robots, so we're making a little bit of a hard pivot there. But I guess these things use AI chips, so maybe it all works out. So Apple is reportedly interested in humanoid robots. If that is the case. That would put it, I guess, in direct competition to a robot from called Optimus. Over at Tesla, you have figure putting out slick videos on LinkedIn, but again, not really. I don't see their robots out in the wild. Is this the technology that we're all going to look at ten years from now saying, wow, we should have invested this in some way, or it's just a lot of hype, and it's going to take a long time to be surrounded by robots, even on a factory floor. Brian?
Paul Meeks
I think it's more of the latter, of course, who got this conversation going with humanoid robots? It's Elon Musk, and one of the reasons he's done that is because Tesla's EV business is in a funk, and so he's trying to distract you with other stuff, like humanoid robots and autonomous driving. So, yeah, of course, on the factory floor, it begins to proliferate. But this is not something that I see becoming really meaningful for much longer than the bulls think. And I think most of it is Elon Musk trying to distract you from the problems of the Tesla's EV business.
Brian Sozzi
It's not worth it, per se. If you're an investor out there to rotate out Nvidia and look for humanoid robot plays, we're not there.
Paul Meeks
No, we're not there. What I would tell you is not now because Nvidia had that hiccup about a month ago, but it's come back. And I never buy a stock right around a quarterly earnings report. It's just too dicey because sometimes, even if a company has great news, the stock still goes down. But, yeah, what I would play is AI infrastructure 1.0 and worry about human eyed humanoid robots down the road. Much down the road.
Brian Sozzi
And lastly, Paul, real quick, before we let you go, I try to ask everyone, I try to inspire a lot of investors here and up and coming investors and even fellow analysts, whatever might be the case, what is the biggest investing lesson that you've learned from covering tech stocks since 1992?
Paul Meeks
Well, you got to be humble. I was one of the biggest tech managers on the planet Earth when the Internet bubble inflated and popped. Brian. I much preferred being very popular than being the guy that everybody wanted to shoot. No, you have to be humble. I think what happens is behavioral finance are entranced with our ideas. And even if they're not working out, we don't sell them fast enough. So I would tell you, everybody wants to talk about their wonderful buy ideas, right? The needle in the haystack that only they could find as an analyst, they don't spend enough time on the sell side. The sell side is sell at your price target. Unless when the stock reaches your price target, you can make a case for greater earnings or cash flow. And quite often the answer is no. Or when it's not working out, limit your losses. Don't have hubris because we all have a tendency to go in the casino and keep on doubling down, going back to the ATM, inside the casino until we're really screwed.
Brian Sozzi
I will tie that in, bow in a bow and just say, stay humble and hungry. Paul Meeks, tech analyst, veteran tech analyst and friend of Yahoo Finance. Good to see you as always. We'll talk to you soon, probably maybe when Nvidia is double the price as it is now, which may happen very soon. Paul Meeks, good to see you, as always. We appreciate it.
Paul Meeks
Best wishes, Brian. Love the program.
Brian Sozzi
All right, thank you so much. All right, before you go here, I should remind you, if you are infatuated with all things Nvidia, go back to check out a prior episode where I talked to EMJ Capital founder Eric Jackson. He is thinking that shares Nvidia could double, double before year end. You can, of course, watch that on Yahoo. Finance, on our platform or your podcast platform of choice. That's it for the latest episode of opening Biddenness.